United Kingdom

The Fall and Rise of Cryptocurrency

From its somewhat mysterious origins as one of the earliest cryptocurrencies, Bitcoin has now made the transition into the mainstream financial world and occupies a prominent place in the global media.

Whilst the most well-known cryptocurrency, Bitcoin is by no means the only form of digital exchange; in fact it now shares the stage with hundreds of other electronic currencies and tokens in usage around the world. Their substantial growth in value during the latter part of 2017 has transformed them from something relatively quirky and exciting into a financial asset that needs protection.

The risks associated with holding Bitcoin are, in essence, the same as traditional money. If you store wads of cash in your house or in your wallet, there is a chance that someone will try and steal it. To mitigate this risk, you put your money in a bank. Similarly, if you hold Bitcoin on your computer or smartphone, there is a risk that someone will access that device and steal your digital currency. This has led to the foundation and development of Bitcoin depositories, where it is possible to safely store Bitcoin “offline” to protect against theft. Just as traditional banks reassure their clients of their ability to refund stolen currency by the purchase of insurance, so the new Bitcoin depositories now seek to do the same.

Lead by Jeff Hanson of the Global Broking Centre in London, Aon has been working with a number of new start-ups providing Bitcoin depository services to design and create solutions to safeguard against theft, whether it be internal fraud or third party hacking.

Whilst crime insurance for financial institutions has been an established market for more than a century, policy forms cater for valuable physical property such as cash, securities and precious metals, as well as traditional government-backed currencies held or transferred in electronic form. These policies do not include purely digital currencies. In response, Aon has developed new policy forms to address this new method of transacting business, from the “warm storage” risk where the digital currency is “live” within the financial system, to the “cold storage” risk where it is stored off-line.

As with all new areas of risk, the insurance market is in a state of rapid and continuous development as more potential clients see the value of insurance, both to protect their business and attract and retain customers. However, this initial growth has recently been hampered by a series of high profile losses involving digital currencies during 2017 and early 2018, including:

  • Coincheck hacked and USD534 million stolen.
  • Bithumb hacked and 1.2 billion South Korean Won stolen.
  • CoinDash hacked and USD7 million in Ethereum stolen.
  • Veritaseum hacked and USD8.4 million in Ethereum stolen.
  • Parity Technologies hacked and USD32 million in Ethereum stolen.
  • Enigma marketplace hacked and USD500,000 in Ethereum stolen.
  • Tether hacked and USD30 million worth of tokens stolen.
  • NiceHash hacked and USD70 million stolen.
  • EtherDelta hacked and USD266,789 in Ethereum stolen.

Previous to the recent Coincheck hack, there was USD75 million to USD100 million of insurance market capacity available in the London market for warm storage risks but the sheer size of this loss has made crime underwriters wary of writing further risks of this nature and, at least in the short term, the market for warm storage insurance has almost ceased to exist. Insurance for cold storage risks is still available, with potential limits up to USD500 million still offered to the right companies. However, underwriting criteria is tough and only those perceived as being at the top of their game will be afforded quotes from the market.

To find out more contact our FinTech Specialist Jack Hammond